Just checking if my logic is sound…
Over a six month period, here are the details:
BRL/USD spot rate = 5.3588
USD 6-month rate = 1.23%
BRL 6-month rate = 5.22%
Expected BRL/USD spot rate in 6 months = 5.4917
The question asks if you should accept or reject the carry trade, showing calculations.
I got to the right answer using this logic:
Spot Rate Return: 5.417/5.3588 - 1 = 2.48%
Carry Trade Return: (5.22%/2) - (1.23%/2) = 1.995%
Holding Period Return = -0.49%, therefore reject carry trade.
Are there flaws to this approach?